Interest rates to stay steady until 2016, says Saul Eslake

Senior markets reporter

"We expect the RBA to hold policy rates unchanged for an extended period throughout 2015 and gradual rates hikes beginning in the first quarter 2016.": Economist Saul Eslake is the third economist to change his view on the interest rate cycle since the release of Treasurer Joe Hockey's federal budget last week. Photo: Pat Scala

Prominent economist Saul Eslake has ditched his forecast for a final rate cut from the Reserve Bank of Australia in this cycle and now expects that the central bank will be on hold next year before tightening begins in 2016.

Mr Eslake is the third economist to change his view on the interest rate cycle since the release of Treasurer Joe Hockey's federal budget last week, with TD Securities and Citigroup delaying their predictions for the timing of interest rate increases.

The Bank of America-Merrill Lynch economist did not attribute his change in strategy to fiscal policy, though he said that fiscal policy was "less contractionary than it had threatened to be".

"We do not think the case for a rate cut has been dealt a decisive blow, rather it has been chipped away at by recent more positive data," Mr Eslake wrote, emphasising that he sees no case for tightening in 2014 or 2015 in spite of the consensus view.

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"We still forecast below trend growth and a rising unemployment rate," he said in a report. "But overall activity has seemingly stabilised, particularly in the labour market to our mind removing the threat of a further cuts.

"But we also are cognisant that the decline in the mining investment cycle presents significant downside risks late in 2014 and 2015. As such we expect the RBA to hold policy rates unchanged for an extended period throughout 2015 and gradual rates hikes beginning in the first quarter 2016."

The RBA dumping its easing bias and moving to a neutral policy stance raised the ire of the Treasurer last month because the absence of an explicit reference to future rate cuts had paved the way for a higher Australian dollar, making charting the course of fiscal policy more difficult. Still, some economists are holding on to their views that this is not the end for rate cuts in Australia, including Goldman Sachs.

Westpac chief economist Bill Evans had already changed his view on the rates cycle in March. Mr Evans' view has been closely watched because he was the first economist to call the start of the RBA's easing cycle in 2011, though at the time of his revision Mr Evans said he thought the economy would benefit from further easing.

Economists at the Big Four banks are in agreement that rates are on hold, with National Australia Bank's Alan Oster the last to come on board days before the budget. Even with clear economic headwinds including tighter fiscal policy, Mr Oster believed that it would take something "extraordinary" for the RBA to cut again.